One of the biggest questions many divorcing couples have is: how will our joint assets be divided? What about joint or individual debts? What can divorcing couples do to ensure that each partner makes it out of the marriage with financial stability? Below, family law attorney Val Hemminger illustrates some of the most common methods for dividing property in a divorce.
Ways to Divide Assets in a Divorce
Each state has its own laws that govern how trial courts can divide assets and debts, and most states fall into one of two categories: community property and non-community property.
Community Property States
In community property states, all the assets and debts acquired during the marriage are considered marital property that must be divided equally. This is true even if assets or debts are only in one spouse’s name.
It’s important to note that only assets acquired during the marriage are considered community property; if one partner entered the marriage with significantly more assets than the other, they should be able to retain these assets in the divorce, even without a prenuptial agreement.
Non-Community Property States
In states that don’t follow community property principles, assets and debts are divided through an equitable distribution method. This means that while assets and debts can be divided equally if the circumstances warrant, they don’t have to be—and if one spouse has a greater earning capacity than the other or bears more responsibility for running up household debt, they could find themselves receiving less than half the marital assets.
“In divorces where there aren’t enough liquid assets to divide the estate in an equitable way, the judge may order one spouse to sell certain assets to provide an equalization payment to the other,” says Hemminger.
Courts will also consider the tax consequences of cashing out pre-tax retirement accounts or selling a primary residence.
Factors Courts Consider When Dividing Marital Property
When courts divide marital property, in non-community property states, they don’t merely split things down the middle. Instead, they must weigh multiple factors, including:
- Each spouse’s age and health
- Each spouse’s earning potential
- Whether there are children born of the marriage
- Whether either spouse has other child support or alimony obligations
One common situation occurs when there’s a significant income difference between the two spouses, such as when one spouse has spent years as a stay-at-home parent. In these cases—especially if the lower-earning spouse isn’t likely to increase their earning potential in the near future—the lower-earning spouse may be given more than 50 percent of the marital assets to balance their lower future earnings. In some situations, the higher-earning spouse may also be required to pay alimony, or spousal support, for a specified period while the lower-earning spouse improves their earning ability.
Dividing Your Marital Assets On Your Own
“In some cases, divorcing spouses may prefer to come to an agreement on their own instead of putting their property division in the hands of a judge,” says Hemminger. “This allows both spouses to exercise more control over their property and can help eliminate surprises—as long as the property is divided in a fair and equitable way.”
In other words, a judge might not approve a settlement agreement that is majorly unbalanced, even if both spouses have agreed on how the assets will be divided.
Negotiating with your soon-to-be-ex-spouse with the goal of avoiding a contentious court proceeding can also help reduce conflict.
List all items of value
When you’re starting to divide your assets and debts, the first step is to take an inventory of what you own and owe. Don’t forget non-tangible assets like retirement accounts, bank accounts, real estate, and any inherited assets.
If you and your spouse are struggling with how to divide your property, you may be able to benefit from a mediator or another neutral third party who can help reduce tension.
Value and order your assets
After you’ve listed all the items you’d like to divide, you can estimate the value of each. You may then want to order the list by most to least valuable to ensure that the ultimate division is an equitable one.
List all your debts
The division of assets can’t be finalized without a corresponding division of debts. In other words, if a house is a marital asset but is subject to a mortgage, awarding the house to one spouse could also burden them with the mortgage, reducing the value of that asset.
One of the simplest ways to tally marital debts is to get a free copy of your annual credit report for both spouses. This credit report should list all outstanding debts and credit accounts, including mortgages, home equity loans or lines of credit, student loans, credit cards, auto loans, and any accounts in collection. Most people, however, tend to have a pretty good grasp on their debt situation.
Dividing debts can sometimes be trickier than dividing assets, especially if the debts are held in just one spouse’s name (like student loans or credit cards). If you can prove that one spouse is responsible for incurring marital debt (for example, by running up credit card bills without the other spouse’s knowledge or getting into gambling debt), the resulting debt may be set aside to that spouse instead of divided equally.
Finally: Write up a settlement agreement for the court’s approval
Once you and your spouse have come to an agreement on most of the major points of your asset division, it’s time to write up a draft agreement for the judge’s signature. Courts often encourage parties to reach a settlement themselves without going to trial, as these settlement agreements are often easier to enforce since there is buy-in from both sides.
There are caveats, however. Courts often won’t approve a settlement agreement that awards one spouse a significantly higher share of assets than the other spouse without explanation (especially if the spouse who stands to benefit has an attorney and the other one doesn’t). These decisions are more likely to be overturned on appeal for being inequitable.
If you have avoided court and want a binding legal separation agreement, make sure you hire a lawyer in your jurisdiction to draft the agreement.
Courts also like to see that the divorcing parties are represented by experienced legal counsel. Although it’s possible to DIY a divorce settlement, and there are forms online for this purpose, state laws can be complex. Having an attorney to walk you through the process and ensure nothing is being overlooked can be invaluable in allowing you to reach a mutually-agreeable settlement.
About Val Hemminger
Val Hemminger, a divorce attorney, is passionate about transforming family law and the client experience. She is diligent in her duty to serve her clients and honors all members of a family experiencing the transitions of separation and divorce. She has practiced for more than 25 years, and from her experiences, she developed the “Be the BEST Divorce Lawyer Academy,” an online program that includes group coaching to help other divorce and family law attorneys succeed.
*Disclaimer: The content in this article is only intended to act as a general overview on a legal topic and is not legal advice. It is information-based only. All of the information is prefaced by assuming you live in a “community property” and “no-fault” state, province, country, or territory. This article is written by a Canadian lawyer and has a Canadian perspective. The separation and divorce laws in the United States, Europe, Britain, Australia, and New Zealand are all different. Consult legal professionals in your jurisdiction For legal advice as it pertains to your legal situation – please consult with a family law lawyer in your specific jurisdiction.